Associate Professional Risk Manager

Transcription

1 Associate Professional Risk Manager CANDIDATE GUIDEBOOK THE CORE CONCEPTS OF RISK MANAGEMENT

2 EXECUTIVE SUMMARY Designed by industry leaders, the Associate Professional Risk Manager certificate (Associate PRM) is intended for staff entering the risk management profession, or those who interface with risk management disciplines on a regular basis and who want to understand fundamental risk management methods and practices. It is mathematically and theoretically less detailed than PRMIA s Professional Risk Manager (PRM ) designation and will cover the core concepts of risk management. The Associate PRM exam consists of 90 questions. The syllabus is based on the publicly available book, The Essentials of Risk Management, together with extensive information freely available on the PRMIA website. Registration for the exam is via the PRMIA website and taking the exam is designed to suit the needs of the busy risk professional. Passing the Associate PRM carries an exemption from Exam IV of the PRM Exam. Be sure to read this entire document to view important information that will help you be a successful candidate. We hope that you will join us in promoting the PRM program as the standard for our industry and that you will join in our efforts to ensure that it will continue to meet the needs of our members and our industry. CONTENTS 1 EXECUTIVE SUMMARY 2 PROGRAM DESIGN 3 PROGRAM DATES AND LOCATIONS 3 FEES AND REGISTRATION 4 TAKING THE ASSOCIATE RISK MANAGER EXAM 6 ASSOCIATE PRM SYLLABUS 14 PREPARING FOR THE ASSOCIATE PRM EXAM

3 PROGRAM DESIGN DESIGN RATIONALE The Associate PRM is intended for staff entering the risk management profession, or those who interface with risk management disciplines on a regular basis, such as auditing, accounting, legal, and systems development personnel who want to understand fundamental risk management methods and practices. Designed to be highly practical, it is mathematically and theoretically less detailed than PRMIA s Professional Risk Manager (PRM ) designation. The program covers the core concepts of risk management, allowing non-specialists to interpret risk management information and reports, make critical assessments, and evaluate the implications and the limitations of such results. Risk is an integral component of every forwardlooking transaction. Now more than ever before, it is essential to understand the multiple dimensions of risk as well as how to best manage risk to gain a competitive advantage. The knowledge demonstrated by passing the Associate PRM provides a practical, non-ivory tower approach that is necessary to effectively implement a superior risk management program. Successful candidates will be able to: Understand corporate governance, compliance and risk management Be able to implement integrated risk management Know how to measure, manage and hedge market, credit (retail and corporate) and operational risk Define the roles of board members and senior management in managing risk Passing the Associate PRM will demonstrate the essential knowledge necessary to understand and manage risks in any corporate or economic environment. KEY LEARNING OBJECTIVES The key learning objectives of the Associate PRM are to: Gain a familiarity with the concept of risk management and its place in the business, organization or system Gain an overall understanding of the concepts of risk management techniques in a non-quantitative framework Understand how governance fits into the concept of risk management Understand the concepts of risk and return Gain a familiarity with the structure and workings of various financial markets Gain a familiarity with the financial instruments used in risk management Understand the concepts of interest rate risk and hedging Understand the concepts of asset-liability management Understand the concepts of market risk management Understand the concepts of retail and commercial credit risk management Understand the concepts of operational risk management Understand how performance can be measured Understand the concept of enterprise risk management Understand industry standards and best practices of financial risk management Understand the positive role that risk management can play 2

4 READING MATERIAL The Essentials of Risk Management, Second Edition by Michel Crouhy, Dan Galai, and Robert Mark (McGraw-Hill, 2014, ) The following reading materials are all freely available from the PRMIA website at Abridged excerpts from the PRMIA Guide to Financial Markets (McGraw-Hill, 2008) available as a separate document per chapter. Risk Management Practices abridged from Chapters B.1 of the PRMIA Handbook (PRMIA Publications 2004) Volume III, plus a paper, The Evolution of Counterparty Credit Risk Management available as a single document. The PRMIA Standards PRMIA Bylaws PRMIA Standards of Best Practice, Conduct and Ethics PRMIA Governance Principles Case Studies these are available as 12 separate documents PROGRAM DATES AND LOCATIONS For your convenience, the exam is offered on every business day of the year. You may request to schedule your exam at any time. There is no advantage to taking your exam on any particular date. Questions within an exam are drawn from a large database of questions and are administered randomly, creating thousands of unique exam forms, all of comparable difficulty. PRMIA uses the services of VUE, part of the Pearson Publishing family, to administer the Associate PRM exam. Pearson VUE is a professional testing firm that has over 5,500 testing centers in more than 165 countries around the world. Please note some important details about registration, cancellation, identification requirements and space availability in the Registration section found on pages 4 and 5. FEES AND REGISTRATION FEES Fees, relevant to your membership status, are given at Payment by credit card is required for online purchases. If you would like to make alternative arrangements, please contact certification@prmia.org. All manual transactions are subject to a $25 USD processing surcharge. PRMIA Sustaining and C-Suite Members are given a 10% discount on the exam fee. You can become a Sustaining Member online at If you are interested in adopting the Associate PRM as a corporate program, please contact membership@prmia.org. Special pricing on exam vouchers and preparatory materials may be available to your company. 3

5 REGISTRATION Registration for the Associate PRM exam is handled using our online form at When you register, a voucher number will be provided to you that you can use to schedule your exam at the center, date and time of your choice. Once you have obtained your voucher please visit and follow the instructions on how to create an account, select your testing center online or for phone numbers where you can be assisted by a representative of Pearson VUE. Please be certain to have your PRMIA username available and to enter it correctly when registering with Pearson VUE*. Your exam results will be provided to that username via the PRMIA website. It is your responsibility to ensure that your PRMIA username is entered correctly when registering with Pearson VUE. Failure to do so may result in a delay of exam results being reported to you or misreporting of exam results to another member. Please note that all vouchers used to schedule exams have an expiration date. Should you attempt to schedule or reschedule to a date beyond the expiration date of your voucher, it will not be accepted by Pearson VUE. You may contact certification@prmia.org for a new voucher number, which will be provided to you without charge, subject to the condition that the request is made within one year of the expiration date. After one year has passed since the expiration date of the voucher, no replacements will be made. * Your PRMIA username will become your Pearson Vue client question. 90 DAY RULE Please note that there is a strict PRMIA policy that exams may NOT be retaken within 90 days of a prior sitting. Any candidate attempt to transgress this policy by whatever means may result in penalties against the candidate which could include forfeit of any PRMIA certifications, vouchers, and possible expulsion from PRMIA. This rule applies equally where PRMIA exams are available in other languages. TAKING THE ASSOCIATE PRM EXAM EXAM FORMAT The exams are computer-based. You will not receive any copies of the questions. No paper may be brought into the testing center; however, you will be provided with an erasable board upon request. Once admitted to the testing room, there will be a tutorial that introduces the functionality of the exam and a brief message from PRMIA. After this has been viewed, you may begin your exam. You will be asked multiple-choice questions with four possible responses. There are no breaks allowed during the exam. The testing system allows you to mark and review questions as long as time is remaining. Please note that you are unlikely to finish your exams with substantial extra time. You are encouraged to use the tutorial in an expedient manner, but sufficient time is allocated for you to complete the tutorial and the exam. PERSONAL IDENTIFICATION On the date of your appointment, arrive at the testing center at least 15 minutes before the scheduled start time. You must bring two forms of identification with you. The first must be a current government-issued ID with your photograph and signature. In addition to providing identification during the admissions process, all authorized Pearson VUE testing centers will take a digital signature using a signature pad and a digital photograph. Examples of Acceptable Forms of Government Issued ID Driver s License Passport National Identity Card Military ID Examples of Acceptable Forms of Supplemental ID Credit Card Employee ID Card Examples of Unacceptable Forms of ID Library Card Social Security Card 4

6 ARRIVE ON TIME It is very important that you leave enough time to arrive at the testing center early. Candidates that arrive late to the test center may not be permitted to test. The full charge for the exam will be made if you are not admitted for any reason. As these centers offer exams for other organizations as well, not everyone in the room will be taking the same exam, so no assumptions should be made about when other candidates enter or leave the testing center. EXAMINATION ADMINISTRATION Each testing center has an administrator who can assist candidates with any questions that they may have. In the event of any incident (computer failure, inadequate supplies, excessive noise, or any other circumstance) which the candidate believes is not compatible with good examination conditions, this must be brought to the attention of the examination proctor immediately upon the incident being noticed without continuing the exam. Failure to inform the proctor in this manner will invalidate any subsequent candidate incident reporting which cannot be substantiated by the test center. EXAMINATION RESULTS Exams are graded digitally. Your exam results should be available within 15 business days of your test date and will be delivered to you via the PRMIA website which you can access by logging in to the PRMIA website. You will find the results within "My Profile. CANCELLATIONS/CHANGES In recognition of the busy and changing schedules of risk managers, you may change your exam appointment without charge through the Pearson Vue system at Please note that all change requests must be made at least one business day before the testing date or the entire exam fee will be forfeited. Because of the flexibility in rescheduling, all exam fees are considered final sales, and refunds will not be granted under any circumstances. EXAM SECURITY The Associate PRM exam is conducted under secure conditions. Any attempt by candidates to copy questions by any means, including unorganized memorizing, and to distribute these questions to other individuals, will be treated as unethical behavior and may result in penalties against the candidate which could include forfeit of any PRMIA certifications, vouchers, and possible expulsion from PRMIA. Indictment to copy, and usage of copied questions may also result in the same penalties. CALCULATORS No calculators are needed nor provided. 5

7 ASSOCIATE PRM SYLLABUS SECTION A Risk Management: A Helicopter View Chapter 1 of The Essentials of Risk Management Corporate Risk Management: A Primer Chapter 2 of The Essentials of Risk Management A User-Friendly Guide to the Theory of Risk and Return Chapter 5 of The Essentials of Risk Management Understand a common definition of financial risk Understand the general role that a risk manager plays in a company, financial or non-financial Understand some of the basic language used by financial risk managers, including risk types like market risk, credit risk, operational risk, reputation risk, legal risk, business risk, liquidity risk Understand that a balance between risk and reward is a choice that can be managed Understand some basic steps towards implementing a financial risk management program Understand the concept of hedge accounting Understand the use of hedging at Merck as an example Understand the concepts of: diversification the efficient frontier a call option s value risk-adjusted returns The Essentials of Risk Management What is Risk? The Conflict of Risk and Reward The Danger of Names Numbers are Dangerous, Too The Risk Manager s Job The Past, The Future and This Book s Mission Typology of Risk Exposures Introduction Why Not to Manage Risk in Theory And Some Reasons for Managing Risk in Practice Hedging Operations Versus Hedging Financial Positions Case Study Merck and FX Exposure Risk Management into Practice Mapping the Risks Instruments for Risk Management Constructing and Implementing a Strategy Performance Evaluation Harry Markowitz and Portfolio Selection CAPM The Arbitrage Pricing Theory How to Price an Option Modigliani and Miller (M&M) Behavioral Finance Conclusion 13% of the Associate PRM Syllabus (12 out of 90 exam questions) 6

8 SECTION B Corporate Governance and Risk Management Chapter 4 of The Essentials of Risk Management PRMIA Standards Understand the concept and importance of governance Understand the role of the Board of Directors Understand a typical financial risk management structure Understand basic risk management policies Understand the importance and meaning of an escalation policy Understand the role that external parties play in governance (external audit, regulators, the market ) Know the ten core PRMIA governance principles Understand how the PRMIA governance principles: Apply to the Board Apply to the finance and accounting function Apply to the risk management department The Essentials of Risk Management unless noted Introduction Setting the Scene Corporate Governance and Risk Management True Risk Governance Committees and Risk Limits Overview Roles and Responsibilities in Practice Limits and Limit Standards Policies Standards for Monitoring Risk What is the Role of the Audit Function? Conclusion Steps to Success The PRMIA Standards of Best Practice, Conduct and Ethics The PRMIA Governance Principles The PRMIA Bylaws 12% of the Associate PRM Syllabus (11 out of 90 exam questions) Know the PRMIA Standards of Best Practice, Conduct and Ethics for Professional Risk Managers Understand the positive role that risk management plays in the business process Understand the basic operations of the PRMIA organization and practices 7

9 SECTION C An Introduction to Financial Markets Abridged excerpts from the PRMIA Guide to Financial Markets Understand the types of instruments in the Money Markets Understand the basic characteristics of: Bond Markets Stock Markets Foreign Exchange Markets Futures Markets OTC Markets Commodities Markets Energy Markets SECTION D Interest Rate Risk and Hedging with Derivative Instruments Chapter 6 of The Essentials of Risk Management Understand the definition of interest rate risk Understand how changes in yields affect bond prices Understand how changes in the shape of the yield curve affect bond prices Understand the concepts of duration and convexity Understand the calculation of risk in a single security versus a portfolio of securities Abridged excerpts from the PRMIA Guide to Financial Markets The Structure of Financial Markets: Chapter 1 Money Markets: Chapter 2 Bond Markets: Chapter 3 Stock Markets: Chapter 4 Foreign Exchange Markets: Chapter 5 Futures Markets: Chapter 6 Over-the-counter Markets: Chapter 1 Commodities Markets: Chapter 7 Energy Markets: Chapter 8 13% of the Associate PRM Syllabus (12 out of 90 exam questions) Understand the basic principles of A swap Puts and calls Understand the basic concept of Caps and floors Swaptions, exotics and financial engineering The Essentials of Risk Management What is Interest Rate Risk? How Does Interest Rate Risk Arise? Bond Price and Yield to Maturity The Risk Factor Sensitivity Approach Portfolios of Instruments Instruments for Hedging Interest Rate Risk Financial Engineering 9% of the Associate PRM Syllabus (8 out of 90 exam questions) 8

10 SECTION E Measuring Market Risk Value-At-Risk, Expected Shortfall, and Similar Metrics Chapter 7 of The Essentials of Risk Management Asset-Liability Management Chapter 8 of The Essentials of Risk Management Stress Testing and Scenario Analysis Chapter 16 of The Essentials of Risk Management Understand the concept of notional amounts of exposure Identify and define The Greeks as measures of market risk Understand the basic concepts behind Value at Risk Understand the use of Value at Risk in setting risk limits Understand different approaches to determining Value at Risk measures Understand situations in which these approaches work or don t work Understand the concepts of stress testing and extreme events Understand the process of scenario planning Understand the definition and implications of liquidity risk Understand the role of the ALCO Understand the concept of funding gaps Understand the concept and implications of duration gaps Understand some measures of liquidity risk Understand the concept of funds transfer pricing The Essentials of Risk Management Introduction The VaR Controversy A Quick Primer The Notional Amount Approach Price Sensitivity Measures for Derivatives Defining Value-at-Risk How Is VaR Used to Limit Risk in Practice? How Do We Generate Distributions for Calculating VaR? Introduction ALM Goals, Scope, Techniques, and Responsibilities ALCO Interest Rate Risk Gap Analysis Earnings at Risk Duration Gap Approach Beyond Duration Analysis Funding Liquidity Risk Credits and Debits Funds Transfer Pricing Why Has Stress Testing Moved to the Fore? Types of Stress Testing and Scenario Analysis Overview Stress Testing Envelopes Regulatory Requirements for Stress Testing and Scenario Analysis Best-Practice Stress Testing Use of Stress Testing and Integration in Risk Governance Purposes and Methodologies of Stress Testing Scenario Selection Stress Testing Specific Risks and Complex Structured Products Stress Testing in Nonbank Corporations Conclusion: Stress Testing as an Evolving Practice 13% of the Associate PRM Syllabus (12 out of 90 exam questions) 9

11 SECTION F Credit Scoring and Retail Credit Risk Management Chapter 9 of The Essentials of Risk Management Commercial Credit Risk Management Chapter 10, 11 and part of Chapter 12 of The Essentials of Risk Management Risk Management Practices Understand the role that a credit officer plays Understand the unique concerns of retail credit risk Understand the concept of credit scores Understand the concepts of default, default rates and loss rates Understand the factors involved in determining the value of a customer Understand how securitization can transfer risk Understand the concept of pricing risk Understand the role that rating agencies play in measuring credit risk Understand the basic credit ratings from these agencies Understand the implied impact of migration in credit ratings Understand internal rating scores and methods Understand basic financial measures in a loan risk assessment Understand the concept of loss given default Understand common types of counterparty credit risk Understand the use and importance of credit models Understand the calculation of risk in a single credit versus a portfolio of credits Understand the concepts behind credit VaR Understand the concepts behind CreditMetrics models Understand the concepts behind MKMV models Understand the concepts behind actuarial and reduced-form models Understand the basic types of credit derivatives The Essentials of Risk Management unless noted Introduction The Nature of Retail Credit Risk Credit Scoring What Kind of Credit Scoring Models Are There? From Cutoff Scores to Default Rates and Loss Rates Measuring and Monitoring the Performance of a Scorecard From Default Risk to Customer Value Securitization and Market Reforms Risk Based Pricing Introduction Rating Agencies Debt Rating and Migration Introduction to Internal Risk Ratings Financial Assessment (Step 1) Adjustment Factors for Obligor Default Rating (ODR) Loss Given Default Rating (LGDR) Why is Credit Risk Modeling so Important and So Difficult? What Drives Credit Risk at the Portfolio Level? Estimating Portfolio Credit Risk Overview CreditMetrics and the Credit Migration Approach The Contingent Claim or Structural Approach to Measuring Credit Risk Mood s KMV Approach The Evaluation of Credit Portfolios The Actuarial and Reduced Form Aproaches to Measuring Credit Risk Hybrid Structural Models Scoring Models Conclusion Credit Derivatives Overview continued on next page 10

12 SECTION F continued End User Applications of Credit Derivatives Types of Credit Derivatives Credit Risk Securitization Securitization for Funding Purposes Only Conclusion The Role of a Credit Officer: Risk Management Practices Counterparty Credit Risk: Risk Management Practices 13% of the Associate PRM Syllabus (12 out of 90 exam questions) SECTION G Operational Risk Chapter 14 of The Essentials of Risk Management Risk Capital Attribution and Risk-Adjusted Performance Measurement Chapter 17 of The Essentials of Risk Management Understand what constitutes an operational loss and how might we quantify it Understand how operational events are linked to other risk types, such as market, credit, liquidity or reputation risk Understand the concept of a key risk indicator Understand the concept of a key risk driver Understand how to differentiate a key risk indicator from a key risk driver Understand a basic operational risk framework Understand an approach to implementation of an operational risk framework Understand how to implement a simple scenario-based process for assessing and quantifying operational risks Understand how to assess risks relating to new business processes, products or change management initiatives Understand the concept of mitigation and examples of mitigation techniques Understand the role of insurance in operational r isk transfer Understand the concept and definition of risk capital Understand core uses of risk capital Be able to compare and contrast risk capital and regulatory capital Understand the definition of RAROC Understand some uses of RAROC in business decision making The Essentials of Risk Management Evolution and Definition of Operational Risk Management Eight Key Elements in Bank Operational Risk Management How Can We Define and Categorize Operational Losses? What Kind of Operational Risk Should Attract Operational Risk Capital? VaR for Operational Risk Scenario, Scorecard, and Combined Approaches to Quantifying Operational Risk The Role of Key Risk Indicators Mitigating Operational Risk Insuring Against Operational Risk Operational Risk in Nonbank Corporations Conclusion What Purpose Does Risk Capital Serve? Emerging Uses of Risk Capital Numbers RAROC Risk-Adjusted Return on Capital RAROC for Capital Budgeting RAROC for Performance Measurement RAROC in Practice Conclusion 12% of the Associate PRM Syllabus (11 out of 90 exam questions) 11

13 Note: Chapter 15, Model Risk, of The Essentials of Risk Management is not part of the Associate PRM Syllabus. Note: The Epilogue, Trends in Risk Management, of The Essentials of Risk Management is not part of the Associate PRM Syllabus. SECTION H Case Studies Understand the lessons of the Metallgesellschaft Case Study The Essentials of Risk Management (ERM), Chapter 2 Understand the governance lessons from Orange County; ERM, Chapter 4 Understand the governance lessons from Riggs Bank; ERM, Chapter 4 Understand the core principles behind the Group of Thirty Report Recommendations on Derivatives Use; ERM, Chapter 6 Understand the market risk lessons from the LTCM Case Study; ERM, Chapter 7 Understand the ALM lessons from the Continental / Penn Square Case Study ERM, Chapter 8 Understand the retail credit risk lessons from Bankgesellschaft Berlin ERM, Chapter 9 Understand the lessons in credit risk from the Credit Lyonnais Case Study ERM, Chapter 10 All free at the PRMIA website at Case Study: Metallgesellschaft Case Study: Orange County Case Study: Riggs Bank Group of Thirty Derivatives Best Practices Summary Case Study: LTCM Case Study Case Study: Continental/Penn Square Case Study: Bankgesellschaft Berlin Case Study: Credit Lyonnais Case Study: Barings Case Study: NAB F/X Options Case Study: WorldCom Case Study: Bankers Trust Case Study: Daiwa 13% of the Associate PRM Syllabus (12 out of 90 exam questions) Understand the operational risk lessons from the NAB F/X Options Case Study ERM, Chapter 13 Understand the operational risk lessons from the Barings Case Study ERM, Chapter 13 Understand the governance lessons from the WorldCom Case Study from PRMIA Standards Understand the governance lessons from the Banker s Trust Case Study from PRMIA Standards Understand the governance lessons from the Daiwa Case Study from PRMIA Standards 12

14 SYLLABUS SUMMARY Number of Questions in the Exam Percentage of the Exam Number of Pages Percentage of Total A Chapters 1, 2 and 5 of The Essentials of Risk Management 12 13% 69 13% B Chapter 4 of The Essentials of Risk Management plus PRMIA Standards 11 12% 50 9% C The abridged Introduction to Financial Markets 12 13% 72 14% D Chapter 6 of The Essentials of Risk Management 8 9% 21 4% E Chapters 7, 8 and 16 of The Essentials of Risk Management 12 13% 58 11% F Chapters 9, 10, 11 and part 12 of The Essentials of Risk Management plus PRMIA Handbook Volume III extracts 12 13% % G Chapters 14 and 17 of The Essentials of Risk Management 11 12% 48 9% H Case studies from the PRMIA web site 12 13% 94 18% Total % % Section 13

15 PREPARING FOR THE ASSOCIATE PRM EXAM Practicing risk management employees are already preparing for the exams by going to work each day where they interact with other professionals and read industry magazines, software manuals, company policies and procedures, academic journals, websites and regulatory notices. They attend risk committee meetings, prepare risk reports, give presentations and write papers. They attend PRMIA chapter meetings, participate in on-line forums and attend risk management conferences. All of these activities prepare candidates for the Associate PRM exam. GUIDED STUDY Associate PRM Webinar Series The Associate PRM Webinar Series is intended to prepare individuals for PRMIA s Associate PRM Exam. This program covers the core concepts of risk management allowing non-specialists to interpret risk management information and reports, make critical assessments, and evaluate the implications and the limitations of such results. Upon the completion of this series, successful candidates will be able to: 1. Understand corporate governance, compliance and risk management 2. Implement integrated risk management 3. Measure, manage and hedge market, credit (retail and corporate) and operational risk 4. Define the roles of board members and senior management in managing risk The Associate PRM Webinar Series consists of nine one-hour webinar sessions, comprehensive presentation materials and study guides including sample questions. For more information please download the Associate PRM Webinar Series Brochure The Associate PRM Webinar Series is available live or via PRMIA s Learning Management System, allowing participants to complete the webinar series in a self-study format. Materials and instruction within this webinar series is based on the book, The Essentials of Risk Management, written by Dr. Robert Mark, Dr. Michel Crouhy and Dr. Dan Galai. To register, please visit: eaprm Diagnostic Exam You may need to brush up on your risk management theory or on those areas you might not yet have worked on. An online eaprm Diagnostic Exam can be used to assess your current skills as they relate to the Associate PRM Syllabus and/or as a practice exam prior to taking the Associate PRM Exam. See /15